HOTEL ROYAL GARDEN,,DAMAN AND DIU (UT) vs. THE PCIT, VALSAD, VALSAD

Grounds of appeal

raised by the assessee are as follows: “1. The learned Pr.CIT erred in passing an order u/s. 263, when the jurisdictional conditions were not satisfied.

On the facts and in the circumstances of the case as well as law on the subject, the learned Pr.CIT has erred in holding that the AO has failed to make proper enquiry into the facts of the case and on that ground in further holding that the assessment order dated 29/10/2019, passed by the AO u/s. 143(3), is erroneous as well as prejudicial to the interest of Revenue and in cancelling the assessment with the direction to the AO to reframe the assessment.

The Board has examined the matter. The Circular No. 3/2017 of the Board dates 20th January, 2017 which contains Explanatory notes to the provisions of the Finance Act, 2016, at para 46.2, regarding amendment made in section 115BBE(2) of the Act mentions that currently there is uncertainty on the issue of set-off of losses against income referred to in section 115BBE. It also further mentions that the pre-amended provision of section 1 1 5BBE of the Act did not convey the intention that losses shall not be allowed to be set-off against income referred to in section 115BBE of the Act and hence, the amendment was made vide the Finance Act, 2016.

As per norms of accountancy income declared during survey cannot be a revenue head. It has to be explained in terms of unaccounted purchases, unaccounted sales, unaccounted expenses, unaccounted investment in any kind of asset which are not recorded in the books of accounts or source of any credit entry made in the books of accounts. However, the Assessing Officer in spite of case selected for complete scrutiny failed to do so and no further enquiry investigation or clarification was sought from the assessee regarding the exact breakup or nature of income.

The above show cause notice was duly delivered to the assessee. In reply to the show cause notice, the assessee filed its submission on ITBA portal on 24.03.2022 and 25.03.2022. However, Ld. PCIT after going through these assessee`s replies noted that declaration made during the course of survey proceedings on the premises of the assessee on 10/09/2016 was on account of under the head sundry receivable account. It was further stated that the assessee firm had duly credited the same to the income declared during the survey and debited the same to the cash account. It is further submitted that the copy of cash book for financial year 2016-17 was also submitted during the assessment vide letter dated 27/10/2019. In this connection it was observed by Ld. PCIT that a person who receives goods or services from a business in credit or does not make the payment immediately and is liable to pay the business in the future is called a Sundry Debtor and businesses use an account to track these transactions and they are called as Sundry Debtor account or Accounts Receivable.

Thus, Ld. PCIT noted that no such details were produced by the assessee either before the AO or even before him till the date of passing the order by him (ld PCIT) under section 263 of the Act. During the course of assessment the assessing officer is required to assess the correct income of the assessee. The assessing officer is required to go through the documentary evidences and books of accounts of the assessee and come to a conclusion that the income shown by the assessee in the return of income is correct. In this case the assessing officer has not even mentioned the most important fact that during the year under consideration a survey was conducted on the premises of the assessee and substantial income was disclosed. It is pertinent to note that from 1/4/2019 till the date of survey (six months), the assessee has disclosed an income of Rupees 50,26,300 and for remaining (six months) it is only Rupees 38,81,062 even though this part of the year the sales of the assessee remains to be maximum. The AO has not examined the profit and loss account for the period 1/4/2016 to 10/9/2016 and from 11/9/2016 to 31/3/2017 and verify the gross profit and by the assessee commensurate with the earlier period. Clearly the assessing officer has accepted the disclosure on its face value without going through the nature of transactions which have been disclosed and whether such disclosure is proper or not. In paragraph (3a) of the letter dated 25.03.2022 the assessee seems to be confused whether there was a diary found at the time of survey conducted by the Income Tax Department, in which such sundry receivable were recorded or not because it is a stated that: "Nothings in the form of a diary in which these receivables were recorded was impounded during the course of survey action. The receivables listed in the diary aggregated to Rs. 50,04,100 relating to F.Y. 2015-16 and Rs.50,26,300 relating to F.Y.2016-17" Relevant paragraph (3 a) of letter dated 25/3/2022 is reproduced as under:

The Ld. PCIT further noted that in paragraph (3 e) of the letter dated 25.03.2022, the assessee has misinterpreted the whole circular issued by the CBDT. The question involved in the circular was not whether the income disclosed during the course of survey should be treated as per the provisions of section 68, 69, 69A, 69B, 69C of the Income Tax Act. The question was whether the losses of earlier years can be set off from deemed income under section 15BBE of the Act. Any income which is disclosed during the course of survey (whether in cash or kind) has to be tested on the basis of books of accounts maintained by the assessee and if it has not been disclosed than on the basis of nature of that income i.e. whether it is unexplained investments, unexplained money or amount of investments which are not fully disclosed in the books of accounts or cash credits would be treated as deemed income which is to be taxed as per the provisions of section 115BBE. Thus, findings of survey proceedings are very important and are to be rigorously pursued in terms of enquiry or verification as to verify whether the income has to be taxed as per the provisions of section 115BBE or not. In the present case the AO has failed to do so. Further it has been submitted by the assessee that partners’ capital account has been credited with the amount of Rs.50,26,300/-. The assessee has failed to appreciate that it was income of the firm which needed to be considered in the hands of the firm and only after that it has to be apportioned among the partners after being taxed. It is not that simple that even if the income belongs to the partnership firm simply by crediting the partners account an asset can be created in the partnership firm without routing it through profit and loss accounts.

Therefore, the Ld. PCIT further noted that the question involved in these proceedings is not that the disclosed amount during the course of survey has been Page | 8 /AY.2017-18 Hotel Royal Garden reflected in the computation of income. The question involved is whether AO considered the disclosure of income properly and determined the income of the assessee for the year under consideration on the basis of documentary evidences available at the time of records and if any further clarification or verification or enquiry was to be conducted whether such action has been taken or not? And finally in absence of any such action taken by the assessing officer whether the assessment framed is erroneous and therefore pre-judicial to the interest of Revenue. The assessee has also cited before Ld. PCIT the decision of hon’ble Rajasthan High Court in the case of CIT vs Bajargan Traders without even going through the facts of the case. In that case the excess stock was found for which bills were not readily available but assessee could established its bona fides that the stock available at the time of income tax proceedings was part of the business of the assessee and therefore not to be treated under sections 68,69,69A,69B,69C of the Income Tax Act. The assessee has also given a plethora of cases without verifying whether the facts of the case are similar to the facts of the case of the assessee. In the present case the assessee was duty-bound to come out with full particulars which it has not done. In fact, the AO was much benevolent that without any particulars, income has been accepted without conducting any enquiry or verification that too in case of a survey. The disclosure of income in return of income is neither based on the whims of the assessee nor is the assessment in a particular manner a prerogative of the assessing officer. The whole exercise is to be based on facts and it is the duty of the assessing officer to marshal all the facts and come to a logical conclusion about the income of the assessee for the year under consideration.

Therefore, considering these facts, an opportunity was given by Ld. PCIT to the assessee to furnish full particulars by way of notice dated 17/03/2022, however instead of furnishing complete particulars about the disclosure of income and how the income was determined on the basis of facts which were available at the time of survey, the assessee has preferred to give explanation which is not based on facts. In view of the above facts Ld. PCIT held that assessment order is not based on appreciation of facts which were very much available before the /AY.2017-18 Hotel Royal Garden assessing officer nor law which demanded that the assessing officer to assess the income of the assessee under proper head and therefore the assessment order needs to be revised. Therefore, Ld. PCIT noted that the assessment order u/s. 143(3) of the I.T. Act, 1961 in the case of assessee( Hotel Royal Garden) for AY.2017-18 passed on 29.10.2019 by the Assessing Officer is erroneous in so far it is prejudicial to the interest of revenue. Therefore, the assessment order u/s. 143(3) of the Income tax Act, 1961 dated 29.10.2019 for A.Y. 2017-18 in the instant case was set-aside by Ld. PCIT with the direction to frame the assessment De novo after making proper enquiries on aforesaid issues.

Aggrieved by the order of the Ld. PCIT, the assessee is in appeal before us.

Learned Counsel for the assessee submitted before us that assessee made a declaration during the survey proceedings for two assessment years, namely AY.2016-17 and 2017-18 and at the time of survey proceedings, the statement recorded by the Income Tax Authority clearly shows that the amount was pertaining to financial year 2015-16 and financial year 2016-17 which were not recorded in the regular books of accounts. However, the assessee has disclosed the same during the survey and it was stated by assessee that such undisclosed income had not shown in books of accounts and it was also stated by the assessee that it pertains to his business.

The Ld. Counsel submitted that assessee does not have any source of income other than his business income and the amount disclosed during the survey pertains to business income, therefore it should be assessable under the head business income and not under the head income from other source under sections 68/69 of the Act.

The Ld. Counsel admitted that although the Assessing Officer has not raised the query regarding the issue raised by the Ld. PCIT in his order. However, the Assessing Officer might have examined the issue from survey documents available with him. That is, all the survey material was with the file of the /AY.2017-18 Hotel Royal Garden Assessing Officer and the Assessing Officer might have examined the survey material while framing the assessment order.

The Ld. Counsel also admitted that in the order by the Assessing Officer under section 143(3) of the Act, no doubt, the Assessing Officer has not discussed the issue raised by ld PCIT in his order under section 263 of the Act, however the facts remain, that survey records were with him (AO) so he might have examined the issue, therefore ld PCIT should not have exercised his jurisdiction under section 263 of the Act. Thus, it may be deemed that assessing officer might have examined the issue and might have applied his mind. To bolster his arguments, the Ld. Counsel relied on the various judgements, such as Malabar Industris Pvt. Ltd. vs CIT, 243 ITR 83 (SC), CIT vs Nirma Chemicals Works (P.) Ltd., 309 ITR 67 (Guj.), Gandhi Ram vs PCIT (In CIT vs. Mhaskar General Hospital, TA No.1474 of 2009)(Guj.HC), M/s. Nilkhanth Developers vs ITO (ITA No.2610/Ahd/2014)(Ahd.Trib.). The ld Counsel submitted before the Bench, the case law compilations, which we have gone through. Therefore, Ld. Counsel contended that Assessing Officer has made adequate inquiry and therefore order passed by the Assessing Officer is neither erroneous nor prejudicial to the interest of Revenue, hence order passed by Ld. PCIT may be quashed.

On the other hand, Learned Departmental Representative (Ld. DR) for the Revenue pointed out that Assessing Officer has not raised the issue in the notice under section 142(1) of the Act, therefore there is non-application of mind by the Assessing Officer. The Assessing Officer did not ask the question during the assessment proceedings from the assessee about the issue raised by the Ld. PCIT, therefore there is complete non-application of mind by the Assessing Officer. Apart from this, had the Assessing Officer applied his mind, based on survey records, he would have brought these issues in his assessment order. There is no whisper in the assessment order about the issue raised by the Ld. PCIT, therefore the issue raised by the Ld. PCIT remain unattended on the part of the Assessing Officer. Neither the Assessing Officer has referred survey material in his /AY.2017-18 Hotel Royal Garden assessment order nor the Assessing Officer issued the notice to the assessee to ask question. The assessee should reply to the Assessing Officer and this process has not been completed, therefore it is completely a non-application of mind and it is a case of complete “no inquiry”. Therefore, Assessing Officer has not made any inquiry during the assessment proceedings, hence the order passed by the Assessing Officer is erroneous and prejudicial to the interest of Revenue.

The Ld. DR for the Revenue took us through the question and answer vide page no.115 of the paper book and have gone through the question no.14 asked by the survey team during the survey. The Ld. DR submitted that in answer to question no.14, the assessee has himself admitted that whatever he is disclosing to the survey team was never recorded in the books of accounts. Therefore, it was unaccounted income in the hands of the assessee, therefore such unaccounted income should be assessable under section 68/69 of the Act. The Ld. DR also submitted that since the Assessing Officer has not raised any question during the assessment proceedings about the issue raised by the Ld. PCIT, however the assessee has demonstrated that he had filed reply before the Assessing Officer, which is incorrect and assessee has mislead and distorted the facts. Since, such question was never asked by the Assessing Officer nor he has brought this fact in his assessment order, therefore it is a complete case of “no inquiry” and non- application of mind. Therefore, ld DR prays the Bench that order of Ld. PCIT may be upheld.

We have heard both the parties and carefully gone through the submissions put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the facts of the case including the findings of the ld. PCIT and other material brought on record. We note that Assessing Officer has issued the notice under section 142(1) of the Act which is reproduced below:

From the above notice issued by the Assessing Officer under section 142(1) of the Act, it is vivid that Assessing Officer has not raised any question about verification of the amount undisclosed and its nature, during the survey proceedings. Therefore, it is quite clear that Assessing Officer has not applied his /AY.2017-18 Hotel Royal Garden mind and has not scrutinized the issue raised by the Ld. PCIT under section 263 of the Act. The Ld. Counsel admitted that that AO has asked question by way of issue notice under section 142(1) of the Act, however, it does not pertain to undisclosed amount in survey, but it pertains to huge cash in hand in F.Y.2016-17 till 08.11.2016, which is altogether a different issue, and does not pertain to issue raised by ld PCIT. Therefore, it is clear that assessing officer never asked the assessee about the undisclosed amount in survey and he never applied his mind.

We note that Assessing Officer has also issued a further notice under section 142(1) dated 28.08.2019 which is placed at page no.57 of the paper book, which reads as follows:

Now, we have to examine whether Assessing Officer has brought the material on his assessment order about the issue raised by the Ld. PCIT. To understand this, we have to go through the assessment order of the Assessing Officer, passed by him under section 143 (3), dated 29.10.2019, which read as follows: “1. In this case the assessee filed its return of income for the AY.2017-18 on 30.10.2017, declaring total income of Rs.89,07,362/- vide e-filling acknowledgement no. 274021491301017. Thereafter, the case was selected for complete scrutiny through CASS. Notice U/s. 143(2) of the I. Tax Act was issued on 17.08.2018, which was duly served on the assessee through e-mail. Thereafter, a notice u/s. 142(1) of the I. Tax Act, along with a detailed questionnaire, calling for details and explanations was issued on 28.08.2019 & 01.01.2019 and served on the assessee through e-mail. 2. The assessee has e-filed its submission in response to various notices issued to them and furnished the required details on 04.10.2019, 19.10.2019 & 29.10.2019. 3. The assessee firm is running a hotel and restaurant in the name of “Hotel Royal Garden” in Daman and has earned income from business & profession, during the year. 4. Subject to the above remarks, the total income of the assessee as per returned income filed is accepted. Total income as per return : Rs.89,07,362/- Assessed Income : Rs.89,07,362/- 5. Assessed u/s 143(3) of the I.T. Act, 1961. Given credit to pre-paid taxes after due verification. Charged interest u/s. 234A, 234B, 234C & 234D as applicable. Issued DN/Challan accordingly.”

From the assessment order, it is abundantly clear that Assessing Officer has not discussed the issue raised by the Ld. PCIT, therefore we note that it is a case of complete non-enquiry ( no enquiry) on the part of the Assessing Officer. The assessing officer blindly accepted only the income shown by the assessee in his return of income. We note that purpose of scrutiny assessment under section 143(3) of the Act is to examine relevant income and expenses to determine the /AY.2017-18 Hotel Royal Garden true income of the assessee under relevant head of income. The assessing officer accepted the return of income shown by assessee without any discussion in the assessment order about the issue raised by ld PCIT hence order passed by the assessing officer is erroneous and prejudicial to the interest of revenue.

The argument of ld Counsel to the effect that survey material was there before the Assessing Officer and he might have examined the same, is not acceptable. The income tax liability is not determined based on presumption and assumption, that assessing officer might have examined the issue raised by ld PCIT. We note that the fact that “Assessing Officer might have examined the material or not”, is a doubtful situation. The Tribunal, being a final fact finding authority, would come to know this fact provided the statutory notice issued by AO under section 142(1) of the Act speaks such fact that AO has raised the relevant query and assessee has replied the same. Therefore, the argument made by ld Counsel that “AO might have examined the issue” is not acceptable, because it is not ascertainable whether survey material was with the AO and he has examined the issue raised ld PCIT. The Assessing Officer has neither put the relevant question before the assessee during the assessment proceedings, by way of issue of notice under section 142(1) of the Act nor AO has discussed this issue raised by the Ld. PCIT in his assessment order passed by him. Therefore, we note that Assessing Officer has blindly allowed the claim of the assessee without making enquiry, which is not acceptable. Whether the Assessing Officer made sufficient enquiry or not, the said fact would come to know from his notice under section 142(1) of the Act and reply submitted by the assessee in response to such notice of AO, or at least, the AO should mention this fact, (that he has examined the survey material) in his assessment order passed by him. Therefore, it is a case of complete non-inquiry (no enquiry). Hence, we note that order passed by the assessing officer is erroneous and prejudicial to the interest of Revenue.

It is important to mention here that the AO is not only an adjudicator but also an investigator. He cannot "remain passive in the face of a return which is apparently in order but calls for further inquiry. It is his duty to ascertain the truth

We note that object of section 263 of the Act is to ensure that leakage of Revenue is plugged and tax due to the state not reaching the coffers of the state is prevented by exercise of revisional jurisdiction by the Principal Commissioner/Commissioner. Besides just obtaining the information by Assessing Officer/and just having documents in assessment file, in respect of the issue raised by the Ld. PCIT cannot be taken as akin to enquiring about the information in respect of the issue raised by the Ld. PCIT. In appropriate cases, the assessing officer should conduct further enquiry also. In the assessee’s case under consideration, what the talk about further enquiry, the Assessing Officer has not made any enquiry and accepted the return of income filed by the assessee, as it is, without enquiring about the issue raised by the Ld. PCIT. The Assessing Officer did not issue any notice under section 142(1) of the Act to conduct enquiry. Besides, no any reply was given by assessee. Whatever return of income filed by the assessee has been accepted by Assessing Officer, blindly and without conducting any enquiry, hence order passed by the Assessing Officer is erroneous as well as prejudicial to the interest of Revenue.

On the similar and identical facts our view is fortified by the Judgment of Coordinate Bench of ITAT Delhi vide its order dated 25.01.2019 in the case of Ramesh Kumar in for A.Y. 2014-15, wherein it was held as follows:

Hence, going by the facts narrated above, the language of the Provisions of Section 263 and the interpretation placed on these provisions by the various Courts, the order of the AO falls within the category of being an order which is erroneous as well as prejudicial to the interest of the revenue. In this interpretation of the provisions of the section 263, we rely on the decision of the Hon'ble Delhi High Court delivered in the case of Gee Vee Enterprises vs Add.CIT(1975) 99 ITR 375 (Delhi). The same view has also been held by the Hon'ble Supreme Court in the case of Malabar Industrial Company Ltd vs. CIT 243 ITR 83 (SC). The relevant portion of this judgment, is reproduced as under: "An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall orders passed without applying the principles of natural justice or without application of mind."

Based on the above discussion on assessee`s facts as well as on various precedents applicable to assessee’s facts, we are of the view that revisionary jurisdiction exercised by the Ld. Pr. C.I.T. u/s. 263 of the Act was in tune with the facts and evidences on record, as narrated above, therefore we uphold the order of ld PCIT and dismiss the appeal of the assessee.